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Determinants of Enterprise Training: What are the Training Constraints?

Guest post by: OECD Development Centre

Article Overview: Enterprise Surveys have shown that large variances in training incidence exist across firms. A natural question then is why do certain firms invest more in training and others do not. There is a certain amount of cross-country and individual country evidence in the literature to identify why this is the case.

Determinants of Enterprise Training: What are the Training Constraints?

Enterprise Surveys have shown that large variances in training incidence exist
across firms. A natural question then is why do certain firms invest more in training and
others do not. There is a certain amount of cross-country and individual country evidence
in the literature to identify why this is the case.
The only cross-country/cross-region survey in developing countries that sheds
light on the training determinant is the WBES. This survey contains questions where
firms are asked to rank on a scale of one (not important) to five (very important) the
relevance of seven statements to their decision to provide little or no training (Batra,
2003):
1) training is not affordable because of limited resources;
2) training is costly because of high labour turnover;
3) firm lacks knowledge about training techniques and organisation;
4) firm used a mature technology, so learning-by-doing is sufficient;
5) informal training is adequate;
6) skilled workers are readily hired from other firms;
7) firm sceptical about the benefits of training.
Among the most important reasons for providing little or no training, East Asian
firms responded: 4) mature technology (45 per cent); 5) adequacy of informal training (35
per cent); and 2) labour turnover (33 per cent), to be the three most important
determinants. Firms in LAC region responded: 6) availability of hiring skilled workers from
other firms (44 per cent); 4) mature technology (35 per cent); 5) adequacy of informal
training (33 per cent), being the three key reasons. For firms already using mature
technologies, there is limited scope for improving on existing techniques and workers can
become more proficient by learning by doing or through informal training (Batra, 2003).

The WBES also indicates that 27 per cent of firms in East Asia and 13 per cent of
firms in the LAC region face training constraints due to 1) non-affordability coming from
limited resources. This is likely to be the case due to the credit constraints faced by many
enterprises in developing countries. While there are increasing numbers of training
grants and subsidy schemes available in developing countries, not all the firms are
eligible for training subsidies and credit availability may thus be important. Small- and
medium-sized enterprises (SMEs) are more likely to face this type of training constraint
since they are the ones who are less likely to have access to the credit market. Indeed,
the WBES show that, in East Asia, 29 per cent of small-sized firms, and 19 per cent of
medium-sized firms cannot afford training due to limited resources, whereas only 13 per
cent of large-sized firms cannot afford it (Batra, 2003).
Lack of knowledge also appeared to be an important reason for providing little or
no training. This was especially true in East Asia (24 per cent). Larger firms are more
likely to have better access to information on training techniques and organisation.
Indeed, in East Asia, only 18 per cent of large firms claimed to have constraints while
more than 28 per cent of small firms lacked access to such information (Batra, 2003).
Firms having a perception of high-labour turnovers is another important reason
why firms provided less or no training. Thirty-three per cent of firms in East Asia and 18
per cent of firms in the LAC region indicated their doubt that training investment is not
worthwhile due to worker turnovers. This is more likely to be the case among small firms
facing difficulties, whether financial or contractual, in providing incentives to keep trained
workers. This is verified by the high percentage of small firms (32 per cent) showing
concerns, while a smaller fraction of large firms (22 per cent) indicate this to be a
problem.
To sum up, the WBES indicates that firms in East Asia and LAC face training
constraints due to a number of market failures including information constraints, credit
constraints and labour turnovers. These constraints were found to be less binding for
larger firms. Larger firms have much wider opportunities to receive information regarding
training techniques and organisation methods. Their training burden per worker is likely
to be lower than smaller firms, since the opportunity cost of losing one employee in
training activities and per worker cost of training is presumably lower.
Studies that focus on individual countries using firm surveys are consistent with
these findings. For example, Zeufack (1999), Tan and Batra (1996), Tan and Lopez-
Acevedo (2003), and Miyamoto and Todo (2003) show that the effect of firm size on
training incidence is significant and large for Mexico, Indonesia, Thailand and Malaysia.
Miyamoto and Todo (2003) use variables capturing legal status26 in order to capture the
extent of credit constraint among Indonesian firms. They find that having no legal status
reduced the probability of training. Note that the findings that large firm size positively
affects training is consistent with firms not training due to information and credit
constraints and labour turnovers. This is because larger firms are less likely to be credit
constrained, more likely to have access to information on training, and less likely to suffer
from high labour turnovers. Smaller firms on the other hand usually find it hard to gain
credits, participate in training workshops, face difficulties replacing workers engaging in
training activities, and will not be able to provide attractive incentives for workers not to
quit after training.

Another interesting finding from these studies is the positive role of a firm’s
technological sophistication on training determinants. Tan and Batra (1996), Zeufack
(1999), and Tan and Lopez-Acevedo (2003), all show that R&D investment is an
important determinant for training in Mexico, Malaysia, Thailand and Chinese Taipei. For
Mexico this impact becomes even stronger over time (Tan and Lopez-Acevedo, 2003).
This is consistent with firms using a sophisticated production process and R&D requiring
intensive training for workers to adapt to such a mode of operation.

OECD DEVELOPMENT CENTRE
Working Paper No. 211
HUMAN CAPITAL FORMATION
AND FOREIGN DIRECT INVESTMENT
IN DEVELOPING COUNTRIES
by
Koji Miyamoto

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Article Tags: adequacy, affordability, asian firms, credit constraints, cross country, determinant, determinants, developing countries, east asia, east asian, high labour turnover, key reasons, lac region, limited resources, mature technologies, mature technology, natural question, relevance, skilled workers, variances



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